To reach its forecast milk production targets, heavy investment is needed in Russia’s dairy sector. What measures are necessary to make self-sufficiency possible in this currently troubled sector?
Russia will decrease milk imports by 29.9% or about 3.2 million tonnes by 2020, while by 2025 imports should drop by nearly 9 million tonnes making the country almost fully self-sufficient in milk produc tion. This is according to a special report by the country’s Agricultural Ministry.
During 2015-2020 the Russian government will invest RUB 568.2 (US$ 14 billion, based on the forecast exchange rate of 2018) and encourage private investors to put a lot of money in the industry through soft loans and tax benefits.
Over the coming decade imports should fall not only for milk, but also for all categories of dairy production – on average by 40-70%. An important element of the import replacement policy is the food embargo implemented in August of 2014. The report doesn’t specify if it should last during all this period or if it will be cancelled in August 2015 as it was scheduled initially.
Neglected dairy sector
The recently appointed Russian Agricultural Minister Alexandr Tkachev said that the development of the dairy industry will be a main objective in his new position. He also stated that the situation in the industry is ‘neglected’ and in terms of self-sufficiency the situation in the milk sector is the worst out of the whole Russian agricultural industry.
Production indicators of the Russian dairy industry seem ambiguous. On the one hand, the volume of milk production in 2014 amounted to 30.8 million tonnes, which is slightly higher than in 2013. On the other hand, according to the Russian State Statistical Service, last year Russia produced only 5.3 million tonnes of ‘treated liquid’ milk, which is 1% less than in 2013.
This year, the negative trend continued as in Q1 of 2015 the production of ‘treated liquid’ milk decreased by 1.3%, to 1.4 million tonnes year-on-year, while the production of milk and cream ‘in solid form’ (dry) fell by 18.5% to 21,600 tonnes compared to the same period last year.
Increased costs of milk production
Estimations of Soyuzmoloko, the Russian Union of Dairy Producers, show that devaluation of the Russian ruble which took place last year and the systemic crisis of the country’s economy after Western sanctions, increased the production cost of milk. In Q1 2015 it jumped by 30-40% compared to last year - RUB 22-23 (US$ 0.44 – 0.46) per litre in new complexes (excluding the investment load) and RUB 16-17 (US$ 0.32 – 0.34) per litre at old farmhouses.
Unattractive investment prospects
At the same time, market participants say that all government plans to increase production volumes will be ruined unless the authorities are able to find a way to increase the profitability of the milk production business. As of 1 May, the purchasing price of raw milk in the industry has been on average RUB 16-17 (US$ 0.32 – 0.34) per litre while in some regions, it dropped to RUB 13 (US$ 0.26) per litre, according to Soyuzmoloko data. This is roughly 10% lower than in May 2014. As a result almost half of the industry has been operating with losses during the first half of 2015. The situation is worsened by the fact that the milk production business in Russia has already been balancing on the edge of profitability for several years and many companies meet 2015 with huge debts which may eventually lead to bankruptcies.
“Milk inherently is a social product, it cannot be too expensive on the market, in contrast for example to meat, and therefore its production will not give producers a quick return,” comments the chairman of Soyuzmoloko, Andrei Danilenko. According to him, this recent situation resulted from the fact that milk production was the last industry that agricultural businesses invested in. “So over recent years the milk industry has received less investment than other [agricultural] sectors,” he added. Soyuzmoloko president, Ayrat Khayrullin, already offered the Ministry of Agriculture the idea to implement a corridor of minimum and maximum prices for raw milk. The idea is to force processing enterprises to purchase milk at prices not lower than the production cost, which should ensure that businesses will not suffer losses. Khayrullin didn’t determine the certain rates for such a corridor, but stated that if such a measure would not be implemented, then 2015 will experience a decrease in the dairy livestock population and a drop in the levels of milk production.
The market however, will not face a deficit, as supplies will be increased by producers from Belarus and Kazakhstan which have common customs space with Russia and lower production costs which allow them to dump products.
However, this corridor measure will probably not be implemented, as the Russian Ministry of Agriculture would like to refrain from excessive regulation of market relationships. In this case Khayrullin pointed out that a decrease in the livestock population and bankruptcies of old farms will prove to be unavoidable.